Why it pays to ignore the bubble boffins
“I have observed that not the man who hopes when others despair, but the man who despairs when others hope is admired by a large class of persons as a sage” John Stuart Mill, British Philosopher, 1866
“We have fallen upon evil times, politics is corrupt and our social fabric is fraying” Unknown author, but written on a stone in a museum in Constantinople and dated from 3800BC (some things never change, eh?)
A year ago I wrote in my monthly letter to clients that those experts who constantly despair started off the year with a collage of gloomy predictions. They included an imminent war between the US and Iran, yet another global recession, increased tariff spats between Trump and China and if that wasn’t bad enough, a hard Brexit would finish off stock markets. And then out of the blue – Coronavirus. Aargghh!
The last 12 months have been unprecedented, with governments all over the world locking down economies and imposing draconian laws on their people. The nightly Bad News at Ten has gone into overdrive, wallowing in deepest gloom, eagerly supported by headline writers and antisocial media. So you would think that investors were sensible panicking into cash or cheap passive funds. Bad news sells, but I can assure you it’s never been a sensible idea to make emotional knee jerk decisions on the back of it.
Two weeks ago, the FT introduced a new series (wait for it, wait for it) called ‘Runaway Markets’ with this headline “Investor Anxiety mounts over prospects of stock market bubble” and subtitled “Veteran managers warn over exuberance as stock valuations and other signals flash red”.
The first paragraph read “Screaming stock rallies and wild speculation by have-a-go amateur investors are stirring concerns among market veterans over a bubble to rival anything seen in the last century”. Then follows the case for the prosecution wheeling out ace pessimists like Jeremy Grantham who referred to the speculation as an “epic bubble” (I’ll return to him later)
The first three quarters of the article featured the usual long-term pessimistic suspects, and only at the end were optimists allowed any opposing views, by which time most readers moved on to more gloom.
It reminds me of a research project carried out by New York University through the 1980s studying newspaper articles, which found that bad news stories outnumbered good news stories on average by 4-1, and reached a maximum of 6-1 in 1986 when the US economy was humming along very nicely, thank you very much. I wouldn’t be surprised if bad news stories outweighed by 10-1 today.
There’s been an obsession about stock market bubbles over the last decade, a fact that’s quietly forgotten. Jeremy Grantham, described above as ‘a legendary investor’ with his recent ‘epic bubble’ call, but in 2014 he predicted a previous bubble, followed by a stock market crash in 2016. Didn’t happen.
‘As I look back over the last year alone I’m glad I never listen to pessimists and kept fully invested in quality global funds‘
He’s far from alone. Year after year since 2010 ‘legendary experts’ and ‘Nobel Prize winning economists’ predict bubbles bursting and stock market crashes. Robert Shiller (Nobel Prize winner) is often quoted. In January 2010 he compared the stock market euphoria to the bubble peaks of the 20th Century, and predicted pathetic 10 year returns from US equities. Go check how wrong he was.
Here’s some headlines on bubbles- 11 Jan 2010-“US Stocks surge back towards bubble territory”, 2 December 2013- “Nobel Prize winner warns of US stock market bubble”, 6 May 2014 “Time to worry about stock market bubbles”, 23 June 2016- “Uh-oh. Is the stock market a bubble?”, 5 April 2018- “Epic Market bubble is ready to burst”. And that’s only a few picked at random, since 2010 quoting the same ‘legendary’ experts. What a good job they don’t manage your investments, eh?
And if it isn’t about bubbles it’s about inflation. Pessimists have consistently predicted rampant inflation since 2010. Remember Quantitative Easing? Remember what the gloomies predicted? Even hyperinflation was on the cards. Hasn’t happened yet. As an aside, I see that anything over 2% inflation worries them. Anybody else remember when inflation in the UK hit 26% in 1976, and averaged over 10% pa for the best part of 25 years? And when our mortgage rates were anything between 8% and 16%? And they call us the lucky generation? Aye right.
Let me share with you the predictions of someone I’ve followed since 1985, Dr Ed Yardeni, a US based economist, who worked with the Fed, with stockbrokers, fund managers, in research, and regularly appears as a token optimist on US Money Programmes. Ed has consistently been a long –term bull of equity markets. Sticking with his predictions would actually have made you profits instead of losses.
His view on ‘inflation’ is that he still believes the four ‘D’s’ will combine to keep inflation forces at bay as they have done for over 20 years. These are ‘Détente, Disruption, Demography and Debt’. For a full explanation of the power of the four ‘D’s’ do Google his Ed Yardeni blog, or perhaps buy his professional autobiography “Predicting the Markets’ published in 2018 and which looks back at this career since 1978.
As I look back over the last year alone I’m glad I never listen to pessimists and kept fully invested in quality global funds together with my ‘uncomfortable diversification’ defence.
The pain felt in March last year was almost unbearable, watching red ink splatter across the screens. But boy was it worth it.
However, rumours are increasing that in the looming March Budget our disastrous UK government is considering hiking up rates of Capital Gains Tax successful investors pay when cashing in gains over and above their tax free annual allowance. The tax rate could double (and more). That really is a hike by the way, not the hike of 0.25% headline writers often refer to when writing about interest rates!
So if I were you, and this is only an observation, I’d, a) ignore the bubble boffins for a while yet, b) ignore the inflationists too, and c) at least have a word with your advisers about taking some of your taxable gains while taxes are low. It might be a long long time before taxes will be this low again.